03 Dec Year End Tax Planning for Individuals
If you happen to be like me – desperately seeking any distraction from this holiday season – there is no better time than the present to start some year end tax planning.
Why is tax planning particularly important this year for almost EVERYONE?
- Basically the Tax Cuts and Jobs Act brought generational changes to the tax rules.
- The last time the tax code changed this dramatically was in under President Reagan in 1986.
- People who thought the reporting under ObamaCare was onerous are in for a surprise, a BIG surprise.
- Tax professionals and taxpayers alike are challenged with understanding these new laws and regulations.
- With the average age of the tax professional in Colorado being 68 years old, many are simply closing up shop.
- When it is time to engage you may find yourself out in the cold without adequate representation.
- Little is more disenfranchising than the discovery you handed over hard earned money to our esteemed authorities because your head was in the sand.
Yes – it might be the driest stuff you read all day.
Yes -it will be worth the 3 minutes of your time to peruse.
Not all considerations below may apply specifically to you but they are worth knowing about and sharing with friends or family.
Watch Out For The New Alimony Rules
- Under the TCJA, certain future alimony payments will no longer be deductible by the payer.
- Alimony will no longer be considered income to the recipient.
- Divorces and legal separations that are executed (that come into legal existence due to a court order) after 2018, the alimony-paying spouse won’t be able to deduct the payments, and the alimony-receiving spouse doesn’t include them in gross income or pay federal income tax on them.
It’s important to emphasize that pre-TCJA rules apply to already-existing divorces and separations, as well as divorces and separations that are executed before 2019.
- If you have an existing (pre-2019) divorce or separation decree, and you have that agreement legally modified, then the new rules don’t apply to that modified decree unless the modification expressly provides that the TCJA rules are to apply.
- There may be situations where applying the TCJA rules voluntarily is beneficial to divorcing parties, such as a change in the income levels of the alimony payer or the alimony recipient.
If you’re considering a divorce or separation (or modification of an existing divorce decree), talk to your tax adviser to better understand the tax consequences.
Invest in Qualified Opportunity Zones
- Qualified Opportunity Zones (QO Zones) are low-income communities that meet certain requirements.
- Investing in QO Zones can result in two major tax breaks:
- (1) temporary deferral of gain from the sale of property and
- (2) permanent exclusion of post-acquisition capital gains on the disposition of investments in QO Zones held for ten years.
- Other resources include:
- Draft Form 8996, Qualified Opportunity Fund
- Draft instructions for Form 8996
- Notice 2018-48, Designated Qualified Opportunity Zones under Internal Revenue Code § 1400Z-2
- Rev. Rul. 2018-29, Section 1400Z-2 — Special Rules for Capital Gains Invested in Opportunity Zones
- REG. 115420-18, Investing in Qualified Opportunity Funds
If you’re looking to defer taxable gains while revitalizing low-income communities, QO Zones may be the way to go.
- If you are age 70-½ or older by the end of 2018 and particularly if you can’t itemize your deductions, consider making 2018 charitable donations via qualified charitable distributions from your IRAs.
- Such distributions are made directly to charities from your IRAs, and the amount of the contribution is neither included in your gross income nor deductible on Schedule A, Form 1040.
- But … the amount of the qualified charitable distribution reduces the amount of your required minimum distribution, resulting in tax savings.
Bunch Charitable Contributions through Donor-advised Funds
- The TCJA temporarily increases the limit on cash contributions to public charities and certain private foundations from 50% to 60% of AGI.
- One way to take advantage of this change is to bunch or increase charitable contributions in alternating years.
- This may be accomplished by donating to donor advised funds.
- Also known as charitable gift funds or philanthropic funds, donor-advised funds allow donors to make a charitable contribution to a specific public charity or community foundation that uses the assets to establish a separate fund.
- You can claim the charitable tax deduction in the year they fund the donor-advised fund and schedule grants over the next two years or other multiyear periods.
- This strategy provides a tax deduction when you are at a higher marginal tax rate while actual payouts from the account can be deferred until later.
If you have questions or want more information on donor-advised funds, please feel welcome to contact me anytime.
I welcome the opportunity to help you put together a charitable giving plan.
Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes.
- The exclusion applies to gifts of up to $15,000 made in 2018 to each of an unlimited number of individuals.
- You can’t carry over unused exclusions from one year to the next.
- Such transfers may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.
Take Advantage of the New Child Tax Credit
- Starting in 2018, the TCJA doubles the child tax credit to $2,000 per qualifying child under age 17.
- It also allows a new $500 credit for any of your dependents who aren’t qualifying children under 17.
- There is no age limit for the $500 credit, but the tax tests for dependency must be met.
- The TCJA also substantially increases the “phase-out” thresholds for the credit. Starting in 2018, the total credit amount allowed for a married couple filing jointly is reduced by $50 for every $1,000 (or part of $1,000) by which their AGI exceeds $400,000.
- The threshold is $200,000 for all other taxpayers.
Bottom line, if you were previously prohibited from taking the credit because your AGI was too high, you may now be eligible to claim the credit.
Be wary of the 3.8% surtax on certain unearned income.
- The 3.8% surtax is the lesser of: (1) net investment income (NII), or (2) the excess of modified adjusted gross income (MAGI) over a threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case).
- As year-end nears, your approach to minimizing or eliminating the 3.8% surtax will depend on your estimated MAGI and NII for the year.
- You should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year.
The 0.9% additional Medicare tax also may require year-end actions.
- This applies to individuals for whom the sum of their wages received with respect to employment and their self-employment income is in excess of an un-indexed threshold amount ($250,000 for joint filers, $125,000 for married couples filing separately, and $200,000 in any other case).
- Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income.
- Self-employed persons must take it into account in figuring estimated tax.
- You may need to have more withheld toward the end of the year to cover the tax.
If you earn $200,000 from one employer during the first half of the year and a like amount from another employer during the balance of the year, you would owe the additional Medicare tax, but there would be no withholding by either employer for the additional Medicare tax since wages from each employer don’t exceed $200,000.
Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15% or 20%, depending on your taxable income.
- The 0% rate generally applies to the excess of long-term capital gain over any short term capital loss to the extent that it, when added to regular taxable income, is not more than the “maximum zero rate amount” (e.g., $77,200 for a married couple).
- The maximum 20% rate applies to joint filers with 2018 taxable income (including long-term gains) above $479,000.
- If you hold long-term appreciated-in-value assets, consider selling enough of them to generate long-term capital gains sheltered by the 0% rate.
- Talk to your investment adviser about re-balancing your portfolio.
- When re-balancing consider liquidating some of the high flyers with the dogs to mitigate adverse tax implications of the dreaded $3,000 limitation on capital loss carry forwards.
Postpone income until 2019 and accelerate deductions into 2018 if doing so will enable you to claim larger deductions, credits, and other tax breaks for 2018.
- These include deductible IRA contributions, child tax credits, higher education tax credits, and deductions for student loan interest.
- Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances.
- Note, however, that in some cases, it may pay to actually accelerate income into 2018.
If you have a more favorable filing status this year than next (e.g., head of household versus individual filing status), or you expect to be in a higher tax bracket next year.
Chances are good you may be best served claiming the standard deduction.
- That’s because the basic standard deduction has been increased (to $24,000 for joint filers, $12,000 for singles, $18,000 for heads of household, and $12,000 for marrieds filing separately), and many itemized deductions have been cut back or done away with altogether.
- No more than $10,000 of state and local taxes may be deducted.
- Miscellaneous itemized deductions including un-reimbursed employee expenses are no longer deductible.
- Personal casualty and theft losses are deductible only if they’re attributable to a federally declared disaster and only to the extent the 10%-of-AGI limit is met.
- You can still itemize medical expenses to the extent they exceed 7.5% of your adjusted gross income, state and local taxes up to $10,000, your charitable contributions, plus interest deductions on a restricted amount of qualifying residence debt but payments of those items won’t save taxes if they don’t cumulatively exceed the new, higher standard deduction.
If you typically claim the standard deduction (as opposed to itemizing deductions), chances are your tax bill will decrease for 2018.
- Although personal exemption deductions are no longer available, a larger standard deduction, combined with lower tax rates and an increased child tax credit (see later discussion), may result in less taxes.
- If you usually itemize deductions, the larger standard deduction may change this.
- I am available to analyze your particular tax situation to determine if you will pay more or less under the TCJA.
You may need to adjust your estimated quarterly tax payments.
This is also a good time to check if you’re on track to have the right amount of federal income tax withheld from your paychecks in 2018.
You can correct any discrepancies by turning in a new Form W-4 (Employee’s Withholding Allowance Certificate) to your employer.
If you were in an area affected by a federally declared disaster area, and you suffered uninsured or un-reimbursed disaster-related losses, you can choose to claim those losses on either the return for the year the loss occurred (2018), or the return for the prior year (2017).
If you were in an area affected by Hurricane Florence or any other federally declared disaster area, you may want to settle an insurance or damage claim in 2018 in order to maximize your casualty loss deduction this year.
Maximize Home Mortgage Interest Deductions
- For 2018–2025, the TCJA reduces the limit on home acquisition debt to $750,000.
- For married taxpayers filing separately, the debt limit is halved to $375,000.
- Homeowners that interest paid on home equity loans and lines of credit may be deductible if the funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan.
Thanks to a set of grandfather rules, the new limits don’t apply to home acquisition debt that was taken out on or before 12/15/17 (or taken out on or before that date and refinanced later). This is good news for existing homeowners.
If you have a home equity loan or line of credit, you will need to trace how the proceeds were used to determine if the interest is still deductible under the new law.
Revisit Your Qualified Tuition Plans
- QTPs may be particularly attractive to higher income parents and grandparents because there are no AGI-based limits on who can contribute to these plans.
- Eligible schools included colleges, universities, vocational schools, or other postsecondary schools eligible to participate in a student aid program of the Department of Education.
- Thanks to the TCJA, qualified higher education expenses now include tuition at an elementary or secondary public, private, or religious school, up to a $10,000 limit per tax year.
You may want to revisit your QTPs if you have children or grandchildren who attend elementary or secondary schools.
Monitor State Response to Tax Reform
- States react differently to changes to federal tax law. Some states automatically conform to federal tax law as soon as legislation is passed.
- Other states require their legislatures to adopt federal tax law as of a fixed date. This generally occurs on an annual basis.
- There are some states, however, that pick and choose which federal provisions to adopt.
- Because of this, your state income tax rules may be drastically different than the federal income tax rules.
You may be better off claiming the standard deduction for federal tax purposes but itemizing for state income tax purposes.
Maximize Your Qualified Business Income Deduction
- The new deduction for “pass-through” income is actually available for qualified business income from a sole proprietorship (including a farm), as well as from pass-through entities such as partnerships, LLCs, and S corporations.
- Under the TCJA, individuals may deduct up to 20% of their qualified business income; however, the deduction is subject to various rules and limitations.
- Although there is some uncertainty surrounding this new deduction, there are some planning strategies you can consider.
- There are ways to adjust your business’s W-2 wages to maximize your qualified business income deduction.
- It may be helpful to convert your independent contractors to employees, assuming the benefit of the deduction outweighs the increased payroll tax burden.
- Other planning strategies include:
- investing in short-lived depreciable assets
- restructuring the business
- leasing or selling property between businesses.
I am available to work with you to determine which strategies produce the best outcome.
Take Advantage of Lower Tax Rates and Investment Gains
2018 ordinary income tax rates are generally lower than those for 2017.
- The top rate has been reduced from 39.6% to 37%.
- Also, the top rate now applies to joint filers whose taxable income is over $600,000 as opposed to $470,700 for 2017.
- Some taxpayers who were taxed at 39.6% in 2017 may now find themselves in the 35% tax bracket.
- The remaining six rates are 10%, 12%, 22%, 24%, 32%, and 35%.
2 other resources:
- The IRS launched the fall series of “Get Ready” communications and outreach messages to help you take action to file your tax returns timely and accurately next year.
- The IRS developed a new Publication 5307, Tax Reform Basics for Individuals and Families to help you learn about how tax reform may affect your tax return.
In addition to lowering the tax rates, some of the changes in the law that may have heard about already include: increasing the standard deduction, suspending personal exemptions, increasing the child tax credit, adding a new credit for other dependents and limiting or discontinuing certain deductions.
Most importantly, you may receive a smaller refund – or even owe an unexpected tax bill – when you file your 2018 tax return next year, especially if you did not adjust your withholding this year after the withholding tables changed.
Please feel welcome to contact me at your convenience for guidance on which tax-saving moves to make.